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Fiscal or Monetary, Both, Neither?

Monetary Policy	1112 VIEWS
Monetary Policy
1112 VIEWS

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Monday, March 23, 2020 /10:20 AM / by FBNQuest Research / Header Image Credit: Nearpod

The monetary policy committee (MPC) meets today and tomorrow in Abuja. As we wait to see whether it joins the 39 monetary authorities that cut benchmark rates across the world last week, we also hold our breath ahead of possible changes to the CBN's exchange-rate regime. The temptation is to make the textbook response to the squeeze on demand that we trace to the crashing oil price and the spread of the coronavirus, and cut the policy rate of 13.50%. Egypt managed 300bps and South Africa 100bps but they have strong financial intermediation.

The pass-through from the policy rate to the real economy in Nigeria is weak in comparison, which the committee and the CBN acknowledge in their more honest moments. Policymakers tend to see the cash reserve requirement (CRR) ratio and, in the past six months, the loans-to-deposit ratio (LDR) as their policy tools of choice.

The CBN set out its initial response to the coronavirus last week with an easing of terms for borrowers under its many credit schemes and a small new intervention of its own. (Good Morning Nigeria, 17 March 2020).

As elsewhere, the rapid unfolding of events has forced the federal government to step up its response. The rewriting of the 2020 budget to slash the oil export price assumption to US$30/b, and remove N1.5trn in spending, is underway. Also under discussion are a far larger CBN intervention of N1trn to push import substitution in manufacturing, the securitization of some of the ways and means advances by the CBN, and an N100bn credit for healthcare.

Our preference would be the fiscal stimulus through the CBN working closely with the local banks. In other jurisdictions, the scope for monetary accommodation is limited because the benchmark is already very low/negative. In Nigeria's case the scope is large but the issue is the pass-through.

Following a meeting of his economic advisory council, President Buhari was quoted referring on Friday to a fx "realignment". Unnamed senior officials in the CBN translated the presidential reference to mean unification of the rates. It is said to have transacted at N380 on Friday although one source placed the deal in NAFEX and another in the preferential window (of N307). (Neither explanation is borne out by the daily FMDQ report.)

Given the global headwinds, the trend for central banks to make bold policy responses and the steady diminution of the CBN's reserves, changes to the fx regime appear to be coming.

We recall the liberalization that wasn't in June 2016 and think that the CBN's preference remains a relatively small adjustment to a level it is confident it can hold/manage. (If it couldn't, it would merely repeat the exercise).